Tuesday, 28 July 2009

Quantitative easing - what next?

As Charlie Bean, deputy governor of the Bank, has said repeatedly on his tour of the UK to explain the unusual monetary medicine, it may take as many as nine months to show its full effects. But so far the results have hardly been encouraging. The fact is that the vast majority of this money is being funnelled into banks' reserves – the cash they keep with the Bank of England – and is not finding its way out again.

According to data from the British Bankers' Association, the level of reserves held by major banks rose to £110bn in June, compared with £27bn before quantitative easing began. Indeed, a full 3pc of total banks' assets are now sitting in reserves – a proportion not seen since comparable records began in 1987.

What is alarming is that something very similar happened in Japan, when it experimented with quantitative easing. The Bank of Japan poured cash into the system but it was merely soaked up by the zombified banks, where those who managed them were too scared of losses, under-capitalisation and the threat of collapse to do anything other than put it under the figurative mattress.

Why do we want them to lend again? It was irresponsible before and propped up loads of badly run businesses. Any business whose raison d'etre is to super-leverage debt, and roll over debt constantly, doesn't deserve to live. As for consumers who spend more than they earn, why should we keep that going? Hoard, hoard, hoard!

"the vast majority of this money is being funnelled into banks' reserves – the cash they keep with the Bank of England – and is not finding its way out again."

So much for inflation.

"The Bank of Japan poured cash into the system but it was merely soaked up by the zombified banks, where those who managed them were too scared of losses, under-capitalisation and the threat of collapse to do anything other than put it under the figurative mattress "

Ah yes, even if the government hadn't ordered the British banks to raise their reservers, the banks themselves would be too scared to lend it into the economy because .. well on the verge of a depression who would you be prepared to lend to?